Some days I feel like a home refinancing expert. I've refinanced my home twice in the last three years to take advantage of attractive interest rates. Although interest rates have been rising lately, refinancing may still be an attractive option if you're paying a high interest rate on a mortgage. When my husband and I built a new home in 2000, we felt interest rates were a little high so we opted for a three year mortgage with an 8 percent mortgage rate instead of locking into a 15 or 30 year mortgage with a slightly higher rate.
We were counting on interest rates going down before our mortgage was up for renewal and they did. When the rates went down to 5.5 percent two years later we refinanced. To find the best rate I could, I called my local banks, credit unions, and savings and loan companies. I also checked interest rates on the Internet.
One year later, while checking on the Internet I found a rate of 4.375 percent. (I looked up interest rates because someone told me they had just gotten their mortgage refinanced at 4.5 percent). I ended up refinancing again but not before calculating how much I was going to save in interest versus how much the additional closing costs were going to be. My calculations showed it would take approximately 18 months of payments at the lower rate to recoup the money it cost to refinance. Although my husband and I now have a very attractive mortgage rate, our payment is slightly higher than it was when we were paying 8 percent interest. But instead of having a 30 year mortgage we have a 15 year mortgage. The low interest rate is allowing us to pay our house off in half the time we thought it would!
Although interest rates have been rising lately they are still reasonable, especially compared to the interest rates on many credit cards. In addition to looking for a lower interest rate, people may be considering refinancing to take some of the equity out of their home for things like: paying off high rate credit cards; to fund a home remodeling project; or pay for a child's college education.
Below is a list of some of some things I learned during the two times I refinanced in the past few years.
1) The lowest interest rate is not always the best deal. Some companies may offer a very low interest rate but may charge several points. A point is 1 percent of the amount you are borrowing. As an example, if you want to borrow 0,000 and three points are being charged it will cost you ,000 to borrow the money in addition to other closing costs.
2) Closing costs vary with lender. The U.S. government requires lenders to provide what is called a Good Faith Estimate of what your closing costs will be. Closing costs typically include things such as: credit report fees, title company service fees; title search fees; loan origination fees; appraisal fees; and documentation fees. Your lender will give you an honest estimate of what your closing costs will be. Your actual cost may vary slightly because the lender does not always know what the exact cost of a certain fee will be such as the appraisal fee because they probably work with several appraisal companies who likely all charge different rates. One additional thing to keep in mind about closing costs: you may see advertisements that proclaim their company does not have any closing costs. That may be true. The lender may pay the closing costs for you but the tradeoff for you will likely be paying a higher interest rate.
3) There may be other fees involved when you refinance. For example, the first company we refinanced with required that 12 months worth of property tax money be kept in escrow with them. The credit union we took out our original loan with didn't require any property tax money in escrow. We had to come up with a big chunk of money that we hadn't planned on for that tax escrow account. The second time we refinanced I was smarter and asked how much money needed to be kept in tax escrow. It was only 6 months of property tax money so we ended up getting part of our tax escrow money back.
4) Ask if your homeowners insurance will be paid by you or if the lender will require you to pay money into an escrow account each month so they can pay it for you. Many lenders require you to pay into an escrow account to ensure the homeowner's insurance will be paid.
5) Ask if the loan you plan on taking out can be sold to other lending institutions. The possibility of your loan being sold may or may not be an issue for you. It's not uncommon for loans to be sold. It's even likely your local bank sells some of its mortgages. I don't happen to mind if my mortgage is sold to another lending company. It's happened to me once and it was an almost seamless process on my end. I only had to do one thing and that was set up a new automatic payment from my checking account because I prefer to have my mortgage payment taken out of my checking account automatically each month. That way I don't have to worry about forgetting to pay it on time and possibly incurring late fees.
6) An online bank might be a good place to do business with. A good way to find out if the bank is a real financial institution, check to see if it is insured with the FDIC. You can do an online search with the phrase banks insured with FDIC or a similar phrase to find the current link to check. When I found the 4.375 percent interest rate it was with an online bank whose workforce was located in the Eastern part of the United States. I live in the Midwest. Thanks to the technology of the Internet I was able to easily do business with the bank. Any documentation I needed to fill out was either e-mailed, faxed, or posted on a secure Internet site that I accessed with my own personal id and password. The secure Internet site was associated with a nationally known lending company. For the final signing the lender contracted with a lending company in my area and that's where my husband and I went to sign the final papers and close the loan.
7) Get everything in writing and pay attention to deadlines. For example, if you are quoted a specific interest rate, get it in writing. Be aware though that the interest rate you are given will only be guaranteed or locked in for a specific amount of time, usually 30 days. If interest rates go up during that 30 day period you will still get the lower rate you were guaranteed in writing. If rates go down, some lenders will automatically give you the lower rate. It is possible that the rate guarantee period may be extended. When we were in the process of our second refinancing, a lot of other people around the U.S. were refinancing because rates were really attractive. As a result our lender had a difficult time getting an appraisal scheduled. Even though we didn't close until nearly 2 weeks after our 30 day deadline our lender honored the rate they had guaranteed us even though rates had gone up.
The above items are things I learned during the two times I refinanced. I've done my best to include everything I learned but your experience with refinancing may be a little different and you may find out things I didn't. The best advice I can offer if you are thinking of refinancing is to take time to do research, compare lenders, find out what your total costs will be, and ask questions about anything you don't understand or are not sure of. This will help make the process easier for you and help eliminate any unpleasant surprises that cost you more money than you were planning on spending for refinancing.